Credit Cards, Credit Scores, and Citigroup

David Lazarus of the Los Angeles Times writes about how too-big-to-fail banks like Citigroup and Bank of America are slapping fees on credit card accounts in the wake of legislation that makes it harder for them to prey on customers. Since such a big part of their business was preying on customers, they’re trying to keep as much of it as they still can.

Lazarus pulls off a nice lede, puncturing the hypocrisy of Citi’s Vikram Pandit, who last week thanked taxpayers for his company’s $45 billion bailout:

“Citi owes a large debt of gratitude to American taxpayers,” he told lawmakers in Washington. The bailout money, Pandit said, “built a bridge over the crisis to a sound footing on the other side.”

And how is Citi expressing its gratitude for that act of taxpayer generosity?

It’s slapping a $60 annual fee on many credit cards that previously had no fees and telling customers that if they don’t like it, tough patooties. They can pay off any outstanding balance and take their business elsewhere.

Now if you want to charge an annual fee for a credit card, have at it (as long as it’s disclosed clearly). Disclose it, and let’s hope it incentivizes people to use cash instead.

But Lazarus is smart to point out is that it’s not so easy to just jump off the debt treadmill. Want to get a car loan or buy a house? You may need to pay rent to Citi after all:

Linda Sherry, a spokeswoman for the advocacy group Consumer Action, said canceling an older card that reflects long-term creditworthiness can indeed have an impact on your credit score.

“You might see your FICO score go down by as much as 100 points,” she said.

FICO scores range from 300 to 850. A score above 700 is typically seen by lenders as a sign of good financial health. Anything below 600 represents a greater risk for lenders and can result in higher interest rates.

Lazarus sums up point-blank what this means:

This is where lenders have people between a rock and a hard place. Yeah, you can close down your account, but your credit score might get dinged in the process.

But I’d take the point further: Your credit score doesn’t just affect your interest rates or ability to borrow, it also can affect whether you can get a job (see update below). It seems like quite the invasion of privacy. Why is it legal?

One thing that I wish Lazarus had clarified here is how this will work for existing accounts. I know banks can’t arbitrarily raise rates on existing balances under the new law. But what about if you have a high balance on your card and can’t pay it off immediately? Will the banks still be able to charge you the fee under the new law?

UPDATE: Brian O’Connor of The Detroit News points me to a column he wrote debunking the widespread idea, one that I repeated above, that employers use credit scores when reviewing applications.

“We do not score for employment reports,” says Maxine Sweet, a spokeswoman for the Experian credit bureau. “If you chose to do that, I think you would be breaking the law.”

Employers can get limited credit reports on prospective employees, but they don’t include lots of stuff found on a full credit history. They don’t include your birth date or any information on joint accounts with a spouse, because that information could be used to discriminate in hiring. They also don’t include your credit account numbers, to protect against fraud and ID theft.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.

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